If you're inheriting assets from a trust, you might wonder how exactly it works.  In the simplest terms, a trust is a special legal document saying who gets what from someone’s stuff after they die. Trusts can be different and have special rules set by the person who created them, called the "grantor."  As someone inheriting assets from a trust, it's helpful to know about the types of trusts and how the rules work.  

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How Does a Trust Work?

People often make trusts to give money or things to their kids or grandkids after they die. But they also use trusts to keep some of their money safe from taxes when they pass it on to others.  A big reason people like trusts is because they skip something called probate. Probate can be complicated, expensive, and take a long time. When someone passes away, probate usually needs a judge's approval for giving out stuff to the people who inherit it.

But with trusts, there's no need for that. The person in charge of the trust can give things to the people who are supposed to get them without having to ask a judge first.

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In simple terms, there are two main kinds of trusts: living trusts and testamentary trusts.

A living trust is made while a person is still alive. They put their assets, like money, investments, and property, into the trust.  Someone called a trustee takes care of these things for the people who will get them later.  The person who made the trust can serve as trustee or choose a third party.  

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Living trusts can be of two types: revocable or irrevocable.

Revocable trusts:  In this kind of trust, the person who made it, called the "grantor," can change it or even cancel it whenever they want. They can set rules for how things are managed while they're alive and decide what happens if they can't make decisions or when they pass away. This type of trust doesn't need to go through a court process after the person dies, which keeps family matters private. But, the person making the trust still needs to pay taxes on the things in the trust like they own them directly.

Irrevocable Trusts:  When someone puts things into this type of trust, it usually means they can't take them back out. These things are then not part of what the person owns anymore. Any taxes on the money made from these things are paid by the trust itself. When the person who made the trust passes away, the things in the trust usually don't count as part of their belongings, so they don't have to pay estate taxes on them.

A testamentary trust is made through a will after a person dies. It's used for different reasons, mainly to help people who will get things from the will.  In both cases, the trustee has to follow the rules of the trust very carefully. If the trustee doesn't follow these rules, the people who are supposed to get things from the trust can go to court to protect their rights.

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What Does the Trustee Do?

Here's a simple breakdown of what a trustee does and has to take care of:

1. Receiving and Safeguarding Your Money: The trustee's job involves collecting the things meant for the trust and making sure they're safe. For example, if there's a house in the trust, the trustee looks after it, keeps it in good shape, and gets insurance for it. If there's money or investments, the trustee keeps separate accounts for the people who will get them from the trust.
2. Investing Wisely: The trustee makes a plan to meet the needs of both the current and future people who will get things from the trust. Usually, the investments in the trust are supposed to make money for these people and also grow the initial amount. Sometimes, the trustee can give out parts of the initial amount to these people.
3. Dealing with Taxes: The trustee keeps track of all the money that the trust makes and pays taxes on the money that hasn't been given out. They also let the people getting things from the trust know how much they need to report on their taxes because of what they get from the trust.
4. Keeping Records: The trustee writes down every single thing that happens with the money or things in the trust. Before everything is finished, they show the people getting things from the trust that everything has been handled and given out correctly.

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How Do Trust Distributions Work?

Usually, there are three ways to give out things from a trust.

1. All at once: Everything in the trust is given without any limits.
2. Bit by bit: Things from the trust are given slowly over time.
3. Decided by the trustee: The person in charge of the trust decides when things are given out.

The person who made the trust gets to choose how things are given out.

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What Are Your Rights as a Beneficiary?

Generally, beneficiaries can keep an eye on what the trustee does with the trust. Usually, the trustee sends a yearly report about how the trust is doing—like how much money it's making or losing and how it's being spent. If beneficiaries don't get enough information or think the trustee is not doing their job right, they can go to court to protect their rights.

Example of a common trust setupSally’s father has created a trust and named Sally as the beneficiary with Sally’s aunt as trustee.  Sally’s father decides how the money in the trust will be used and what it will be used for.  The trust might say that some of the money is meant for Sally's education at a specific time or when Sally reaches a certain age.

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